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Delaware Chancery Refuses To Apply Ferengi Principles To Low Income Housing Deals



There have been two important opinions in the Low Income Housing Tax Credit Year 15 struggle so far this month. Both favor not-for-profit (NFP) sponsors. They each deserve their own post, so today we will start with JER Hudson GP XXI LLC which came down May 2 from Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery. First a little bit of background, which you can skip if you are familiar with the issue.

The Year 15 Problem

The major source of funding for affordable housing in this country is the LIHTC – Section 42 of the Internal Revenue Code. States are apportioned credits based on population. A specified agency in each state then parcels out the credits to projects. NFP sponsors have an edge in the allocation process.

Typically the credit will be allocated to an investor limited partner, often a bank that is getting Community Reinvestment Act good dooby points in addition to the return from the credit. The credit is doled out over ten years and subject to recapture for an additional five years. There is a requirement for the property to remain affordable for an additional 15 years, but that is enforced by the state agencies not the IRS.

Section 42 allows for not for profits sponsors to have a right of first refusal (ROFR) to purchase the property for a bargain price at the end of the 15 year compliance period. Many deals are underwritten on the assumption that the ROFR price will take the investor out after year 15.

Lately investors, some of whom have acquired their interest after the credits have been exhausted are not cooperating with the ROFR process and are looking for an additional return that in the view of the NFP sponsors they are not entitled to. In general NFP sponsors have been doing well in state courts and the court of public opinion. Overall the investor interests, sometimes referred to as aggregators have been winning in federal court.


The Case

JER Hudson presents an unusual fact pattern. At issue was Kate’s Trace, a 108 unit project in Newport News, Virginia, owned by Kate’s Trace Limited Partnership (KTLP). Hudson Housing Tax Credit Fund XXI LP (The Fund) held the limited partnership interest in KTLP through a LLC . JER is the general partner of the the Fund. They are the plaintiffs in the case. DLE Investors LP (DLE) is a limited partner in the Fund.

The Fund started in 2002. DLE became a limited partner in the Fund in 2007. Sometime between 2007 and 2020 ownership of DLE changed. When DLE became a partner in 2007, projections indicated that there would be tax credits flowing, but that there would not be much in the way of residuals as the expectation was that NFP sponsors would acquire the properties under the bargain ROFR terms.

The new owners of DLE, Hunt Capital Partners, didn’t see it that way. They tried to convince the GP to buy them out at a premium. When the sponsor of KTLP acquired the Newport News property at the bargain ROFR price, the GP, on advice of counsel, decided to take no action. DLE was not happy with that and sought to remove the GP under the terms of the partnership agreement.

So the GP brought the action to challenge the removal. DLE asserted counterclaims for breach of fiduciary duty, breach of contract and declaratory judgement that the removal was valid.

Enough Is Never Enough

There is little doubt that if Chancellor Zurn were a Ferengi, that DLE would have prevailed in this case in accordance with Rule 97 of the Ferengi Rules of Acquisition Enough is never enough. The opinion outlines some of the bickering that went on between the JER and DLE including DLE refusing to consent to a refinancing unless some of the proceeds were used to buy them out. It was the NFP sponsor NHT Communities that ended up triggering the litigation even though it was not directly involved in it.

In the spring of 2021, NHT and the KTLP general partner started taking the steps to transfer the property under the terms of the ROFR to an affiliated NFP. I will spare you the details. It was a done deal when they informed JER. JER sought advice from law firm Holland & Knight about whether the transfer was proper and whether they could do anything about it.

Based on the advice of H&K, JER, the Fund GP, decided not to spend any of the Fund’s remaining $200,000 in reserve funds engaging in futile resistance to the ROFR exercise. DLE responded to that easy going approach with “You’re fired”.

The Opinion

The essence of Chancellor Zurn’s opinion was that the purpose of the Fund was to reap tax credits and the GP had no duty to try to squeeze more out of the deal. Chancellor Zurn wrote:

At the risk of straying from my task, I will share that I do not believe that a failure to sue over an improperly exercised ROFR can cause a material adverse effect on the Fund after the Compliance Period. As explained, Fund GP’s duties to safeguard the funds and assets of the Fund encompass the Property Partnership Interests and cash reserves, but not the Property itself. As explained, Fund GP is authorized and charged to protect those interests only as consistent with the purpose of the Fund. And as explained, under that purpose, the Fund’s Property Partnership Interests have always been valued as sunsetting with a ROFR disposition. Because the partners understand and intend the Property Partnership Interests will terminate with a ROFR disposition, it seems to me that an improperly exercised ROFR does not change the value of the Fund’s Property Partnership Interests, and so cannot constitute a material adverse event on the Fund. Consequently, failure to correct or rescind an improperly exercised ROFR would be exculpated due to the absence of a material adverse effect on the Fund.


David Davenport is an attorney who has been involved in numerous ROFR cases. He was not directly involved in this litigation, but rather represented the NFP sponsor. He is quite enthusiastic about the opinion.

The written decision was issued earlier this week and represents a scathing acknowledgment and indictment of Aggregators and their misconduct throughout the LIHTC industry. It is an extremely lengthy, detailed, and thorough decision, with more than 350 supporting citations to various other cases, articles, treatises, and sources. ………………………

The Court found that the Hudson Fund GP’s mission was to preserve the Kate’s Trace property as affordable housing under the LIHTC program through a ROFR execution, and the Fund’s course of conduct through the end of the Property’s Compliance Period was consistent with its stated purpose. That purpose was an exchange of investor dollars for tax credits and the original investors exiting the Fund once the tax credits were distributed. The Court further found significant that, fundamentally, the Fund is a LIHTC partnership and its source of value and reason for formation is to participate in the LIHTC program, and the ROFR is a feature of the program that is meant to extend the property’s viability as affordable housing beyond the Compliance Period.

I understand Mr. Davenport’s enthusiasm, but this situation is pretty limited in its applicability. The lesson to aggregators is probably that they need to get control of the GP interests in funds or find GPs who will play ball with them. On the other hand, the opinion does endorse the views of NFP sponsors. And it endorses an “Enough is enough” view of responsible business behavior.


An industry insider told me that what has created this problem is a long period of low capitalization rates that were not anticipated when the projects were underwritten. I tend to think that this sort of thing is an inevitable byproduct of using the tax code as an instrument of social policy. Capitalism hates the commons as we learn from watching Mr. Potter and George Bailey every Christmas.

Other Coverage

Jeff Montgomery has Chancery Nixes Investor Suit To Force Subsidized Apt. Saleon Law 360. The piece is behind a paywall so I don’t know if there is a pun intended referring to Nixon Peabody which represented DEL.

Beth Healy has Courts are handing setbacks to Nixon Peabody clients seeking control of affordable housing on WBUR. This follows coverage in September on the firm’s role in representing aggregators.

Here is a roundup of my coverage of the issue.


Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street



America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.


But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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It Is Time To Buy Bonds



US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle


These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Will There Be War Over Taiwan – The Next Spy Thriller



I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.


Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.


Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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